Profit and Loss Account

Profit and Loss Account, also known as income statement, presents the results of operations of a business enterprise for a period of time. This statement shows net profit or net income of any entity for a period of time. Net profit or income is the difference between revenues and expenses. The profit and loss account indicates how successful a business enterprise has been in achieving its profit goal for a given time span. It also gives the sources and amounts of revenues earned and the different types and amounts of expenses. Net profit indicates an enterprise’s accomplishments (revenues) in relation to the efforts required (expenses) in pursuing its operating activities. When expenses exceed revenues for a period, a business enterprise incurs a net loss.

Profit and loss account starts with gross profit on the credit side brought forward from the trading account. It is also credited with any other item of income and gain such as rent receivable, interest on investments, discount receivable and the like. In case of gross loss brought forward from the trading account, profit and loss account begins with gross loss as the first item on the debit side. The other items on the debit side include indirect or running expenses of the business that is; expenses incurred on selling and distribution of the goods and the general administration of the business. When the credit side (revenues) exceeds the debit side (expenses), the difference is net profit. But, if the debit side exceeds the credit side, the difference is net loss. Net profit is the surplus remaining after charging against gross profit and other non-trading income and receipts all the indirect expenses including depreciation and other provisions attributable to the normal activities of a business.